How you can save enough to send your child to study in preferred foreign countries

Studying in a foreign university was once a dream only the uber intelligent or the super rich could see. However, now every Tanmoy, Deepak and Hari aspires for a foreign degree. And for good reason too. The supply of quality education in India is outstripped by the demand.

Every year, some 11 lakh candidates vie for the 11,000 seats in the IITs. The cut-off percentage for some of the coveted courses in top colleges has hit 99%. “The acceptance rate in Indian colleges offering quality education is below 2%,” says Vibha Kagzi, Founder and CEO of ReachIvy.com.

This has forced many Indians to look overseas. According to World Education News and Reviews, an education news portal, the number of Indian students enrolling in seven key foreign destinations has more than doubled from 1.38 lakh to 2.8 lakh in the past decade.

Agencies that help students in the admission process are all praises for how the education system works overseas. “Equal emphasis is given to academics, extra-curricular activities and work experience at the time of admission. The study environment is very conducive for holistic learning,” says Kagzi.

How much it costs

But studying abroad can be prohibitively expensive. One year’s tuition fee in some Ivy League colleges can be almost Rs 30-35 lakh— almost equal to the total expense incurred on the child’s school education. Even second rung colleges cost the earth. A master’s course from a public US college costs Rs 20 lakh a year.

Then there are other costs to look at as well. If you take the cost of living, comprising accommodation, conveyance, academic supplies, health insurance and entertainment, add another Rs 10 lakh. The cost of living in foreign countries is also significantly higher. For instance, you will need Rs 5.3 lakh in New York or Rs 3.7 lakh in Sydney to maintain the same standard of life that you can have with Rs 1 lakh in New Delhi.

You also need to factor in inflation and rupee depreciation. The rupee has fallen to 70 against the dollar, which is bad news for those planning to study abroad. “Typically, a course lasts for 2-4 years and fund requirement can change drastically with the fluctuations in the exchange rate,” says Renu Maheshwari, Founder of Finscholarz Wealth Managers.

If you are planning to send your child abroad for studies, keep a target of at least Rs 50 lakh for a three-year course. Factor in 8% inflation to calculate the future cost. In 10 years, the present cost of Rs 50 lakh for a three-year course would have risen to Rs 1.07 crore. An eight figure amount may seem daunting right now, but it is achievable if you have enough time and discipline. Depending on your risk appetite and existing savings, find out how much you need to save every month to reach that goal comfortably.

Easy for early birds

The going will be very easy for those who have time on their side. Financial planners say one should start saving for the child’s education as soon as the child is born. The SIP required to amass a corpus of Rs 50 lakh will not be prohibitively high. The outflow will be in small portions and will, therefore, not put a burden on your overall finances. You will also get enough time to put a dynamic strategy in place, changing the asset allocation as per the market changes and increasing the SIP amount in line with the increase in your income.

Also, a longer time horizon gives you room for investing in high-risk instruments. “Over the long term, equity exposure will help you counter the effects of inflation,” says Maheshwari. Money invested over many years will gain from the power of compounding.

Bengaluru-based Abhigna Antani has got her skin in the game to fund her MBA in the US. Taking a cue from her father, who has been a long-term investor in equities, she started investing in equity oriented mutual funds when she got her first paycheque. “I invest half my salary as I don’t want my money to idle in the bank,” she says.

In Pic: Abhigna Antani 25, Bengaluru
Course:MBA in 2019Destination:USAEstimated cost:Rs 70 lakh for a two-year course.Saving strategy:She started SIPs in equity funds when she got her first paycheque and has already accumulated Rs 14 lakh. Her father will also provide some funds though she wants to keep that to a minimum. Instead, she plans to take a loan as she feels MBA from a top US B-school has a good ROI.

Invest in the right option

An early start will not finish the job though. It is also important to invest in the right options. A key determinant of asset allocation should be the number of years left for the goal. Equity funds should be the preferred investment if you have more than 8-10 years before the goal.

Delhi-based Ishan Tripathi was clear that he wanted to do his MBA from a foreign university when he was doing his graduation. To realise this goal, his father started investing systematically in equity funds almost eight years ago. He has two more years before Ishan goes abroad, effectively giving him 10 years to build up the required corpus. Apart from the SIPs in equity funds, he has also locked away Rs 10 lakh in the safety of fixed deposits.

In Pic: Ishan Tripathi 24, Delhi
Course:MBA in 2020Destination:EuropeEstimated cost:Rs 35 lakh for a two-year course.Saving strategy:His father started SIPs in equity funds about eight years ago and has accumulated about Rs 20 lakh. Another Rs 10 lakh have been locked away in fixed deposits. Ishan has savings of around Rs 5 lakh and plans to take an education loan with his father as the guarantor.

Maheshwari says that if you have the risk appetite, 100% equity exposure until five years from the goal can prove very fruitful. “One can start an SIP in a combination of multi-cap funds and mid-cap schemes. However, do review the performances twice a year,” she says.

Equity mutual funds have delivered average annualised return of 15% in the past 10 years. Take a leaf out of the book of 25-year old Antani, who started investing in equity funds three years ago and has accumulated Rs 14 lakh.

Even if you are a moderate risk investor, it is safe to direct 65-70% of your investments to equities if you have a sufficiently long investing horizon. “Along with inflation, equity investments help overcome volatilities risk too,” says Maheshwari. Earnings from these will also help balance out the tax treatment on debt instruments.

For best results, choose a balanced fund. These funds invest in a mix of stocks and bonds, usually placing 60% of their assets in stocks, and get the same tax treatment that equity funds enjoy. Long-term gains are tax free up to Rs 1 lakh and are taxed at 10% beyond that threshold.

Neeraj Chauhan, CEO of The Financial Mall, suggests child plans offered by mutual fund houses to stay focused. He says that these “child plans” have a psychological impact on the investor. “The name serves as a reminder of the objective of investment. The investor therefore avoids interim liquidation for any other purpose,” he says. However, keep in mind that these plans are suitable only if you have more than 6-7 years before your child is ready for college.

Monthly SIP needed to save Rs 50 lakhCalculation assumes that infl ation is 8% and monthly investment is increased by 5% every year.Conservative investments earning 8%PPF and bank deposits are preferred choices. They protect capital and offer assured returns. These are useful if the tenure is 2-3 years. In the long term, they may not be able to beat infl ation and investor will lose the opportunity to gain from the markets.Balanced investments earning 10%A mix of debt and equity for moderate investors will earn good returns without much risk. Equity exposure should be more when the time to goal is over five years. As the investor nears the goal, investments should be shifted to debt to protect wealth.Aggressive investments earning 12%Though equity investments can earn high returns, they also entail higher risks. They will earn good returns over a longer time horizon of fi ve or more years. However, stay away from them if the goal is only 2-3 years away. If the market falls, the investments will suffer losses.

Options for late starters

Even if you started late, say five years before the goal, you should not lose hope. “Narrow down your options to moderate instruments of dynamic funds, equity savings funds and short-term debt funds,” says Chauhan. The ideal strategy would be to start an SIP along with lump sum investments as and when you have liquidity.

Short-term debt funds are not very volatile because their portfolios are lined with bonds maturing in 2-3 years. They offer returns that are roughly equal to the prevailing bond yields and enjoy lower tax rates than fixed deposits if held for over three years.

However, many investors prefer bank deposits because they offer assured returns and capital protection. If you have not saved enough, consider taking an education loan. It is a better option than dipping into your retirement savings, as the latter may jeopardise your retirement plans. Also, education loans are eligible for tax benefits which bring down the effective cost of the borrowing.

Unlike the purchase of a house or a car or going on a holiday, your child’s college is a non-negotiable goal that cannot be postponed. Hence, many investors rely on lowrisk, fixed-income instruments to save for their goals.

However, conservative investors will have to save substantially more than someone who is willing to take a few risks. Take the case of 25-year old Anshika Rawat, who is going to Netherlands for her Master of Science. Anshika’s father started saving early but will still have to use a part of his retirement savings to fund her.

In Pic: Anshika Rawat 25, Dehradun
Course:Master of ScienceDestination:NetherlandsExpected cost:Rs 43 lakh for a two-year courseSaving strategy:Her father has been investing in the PPF and will also use some portion of his retirement savings. She used her own savings of Rs 2 lakh for application process, miscellaneous exam fees, visa process and flight tickets.

Chauhan suggests a mix of Public Provident Fund and debt funds for tax efficiency on investments. “You should put the maximum permissible amount in PPF if you are 15 or more years away from the goal,” he says. If you have a daughter below 10 years of age, you can open a Sukanya Samriddhi Yojana account. It offers 8.1% returns, which is the highest among small savings scheme, including PPF. The tax-free corpus will mature when your girl child turns 21. The beneficiary girl child will be able to make a partial withdrawals for her education upon turning 18.

A recurring deposit is another good option since it allows the investor to lock in at a high rate. Given that banks have increased their deposit rates, this would be a good time to start a recurring deposit. In spite the plethora of options available, remember that in the long run, returns from fixed income securities may not be able to meet inflation. “It is akin to hiring a worker and not making him work,” cautions Maheshwari.

When nearing the goal

The investment strategy has to be dynamic in a long-term goal like your child’s education. We have mentioned the several benefits of equities for a time horizon of 10-15 years. But, as you approach the goal the risk appetite should be lowered. “Move at least 50% of your funds in debt when you are three years away and in the last year shift entirely to debt,” says Maheshwari. Equity is volatile and you should be careful to not let a market downturn affect your child’s education fund at the last moment.

Both Abhigna and Ishan have moved most of their investments into the safety of bank deposits now that they are one and two years away, respectively, from using the fund. Capital protection is the key in the last year of your goal.